Management PDF

MANAGEMENT INTRODUCTION What is management? Management is a range of decisions associated with the acquisition, allocation, and integration of resources (human, physical, financial, etc.) required to perform a certain economic activity. It is about making decisions and people making decis...

MANAGEMENT INTRODUCTION What is management? Management is a range of decisions associated with the acquisition, allocation, and integration of resources (human, physical, financial, etc.) required to perform a certain economic activity. It is about making decisions and people making decisions. When you perform an economic activity, you have a goal and you have to decide which path you want to follow to reach your goal depending on what resources you have. It’s not always easy to make the right decisions, and the right decision depends on which are your priorities (time, money,...) and which resources you have. Economic activity: actions that involve the production, distribution and consumption of goods and services at all levels within a society. Needs Economic activities have as a goal to fulfill people’s needs. Needs come from goals and values people have (what they want to achieve and what is important to their life). These factors differ across cultures and socio-economic conditions and they evolve during time (ex. you have different needs if you’re poor, or the needs they had a century ago aren’t the same we have now). Pyramid of needs: puts on a scale of priority the needs that people have (from the tangible goods necessary to survive to the intangible ones needed for the self actuation). You can’t achieve the upper level towards actualization if you haven’t reached the lower ones. We have to satisfy our needs following a designed path. Needs can be divided into: - natural needs: the ones that are a product of human (physical needs) - social needs: the ones that are a product of spiritual self (morality) and social interaction with others. They can be divided into: - radical: that are fundamental to live in a society (justice, freedom, …) - non-radical: that aren’t fundamental but needed to live a fulfilling life (friendship, …) Needs can be divided into: - essential: we all have them - non-essential: that are different for each one but can be influenced by imitations (fashion, expectation from others, …) Types of goods Goods can be: - primary goods: that satisfy essential needs (water, …) - non-essential goods: that satisfy non-essential needs (luxury items, …) Goods can be: - complementary goods: if you need both of them to satisfy one need (cars and gasoline) - substitutes goods: if you need just one of them to satisfy one need and they can satisfy the same need (cars and motorcycles) Goods can be: - differentiable goods: if a producer can add different features to the good and produce different versions of the same good (bags, …) - commodities: if there are non differentiating features and all the good of that kind look alike (gasoline pumps, …) Goods can be: - consumer goods: if they are ready for final use or consumption (chairs, telephones, food, …) - industrial goods: if they are used to produce other goods (wood, factory machines,…) Good can be: - disposable goods: if they can only be used once (food, cigarettes, …) - durable goods: if they can be used many times (chairs, telephones, …) Goods can be: - goods for individuals: if they are used or consumed by a single individual (bikes, …) - collective consumption: if they are used or consumed by many individuals at the same time (cinema, …) Goods can be: - excludable in consumption: if it is possible to prevent someone from accessing that good (highways, …) - rivalrous in consumption: if the consumption of that good by one consumer prevents consumption by others (seats in a flight, …) A good can also be public (and therefore not private) when it is either (two definitions) - both non-excludable and non-rivalrous in consumption (air, …) - produced by the State or its branches (hospitals,...) Economic activity Economic activity involves: - Technical transformation: transforming raw materials into products. They can be physical (manufacturing), spatial (transportation) or logical (banks with money) - Transaction: that is buying inputs and selling outputs. They link organizations to other organizations and to individuals and they include everything from trading financial resources to trading labour and private goods - Complementary activities: that are all the activities that are needed to manage and make the economic activity working Money always moves through society in two directions and whenever there is a transaction between two entities money can flow in both directions For example money flows from producers to workers as wages, and then back to the producers when workers pay for a sold product. People and activities of business People that are involved in business can be divided into: - Owners: who provide resources to start the business and that either manage the business themselves or hire employees to manage it - Customers: who buy goods and services offered by businesses - Employees: that offer their labour to the business and are responsible for the work that goes one within a business These three categories are closely related to the three main areas of a business - Management: that is concerned with acquiring, developing and using resources (included employees) effectively and efficiently. It involves overseeing firm’s operations to ensure that resources are transformed into goods or services as they should - Marketing: which involves planning and developing products that satisfy customers’ needs, make decisions about how much to charge for their product, how to advertise them and when and where to make them available - Finance: which refers to all activities concerned with obtaining and effectively using money for business operations. It is a primary responsibility of owners to provide financial resources to the business either by borrowing money from a bank or by attracting additional investors Role of the entrepreneur, government and ethic in business The entrepreneur is an individual who risks his wealth, time and effort to develop an innovative product for profit. His goals are: - To earn profit (profit = what customer pays for a product - how much it costs to produce and sell it) - To do it in an ethical-looking way by developing a reputation of trust and avoiding misconduct in the workplace The role of the government is to preserve competition and protect consumers, employees and the environment through laws and regulations. It takes steps to minimize disruptive effects of economic fluctuations and to reduce unemployment. It also spurs growth so consumers spend more money and businesses can afford to hire more employees. Its basic role is to take care of citizens, and that’s why its goal isn’t to make a profit Non-profit organizations may provide goods or services but don’t have the fundamental goal of earning profits. They still can have employees or volunteers working for them and they need skills related to management, marketing and finance as well. They are private and are not allowed to distribute profits or assets. They are typically active in the spheres of culture, education, healthcare, protection of the environment, social programs, trade associations, promotion of civil rights and in all those cases where the moral value of the activity should come before the earnings  they can make from it. In any case, they may still pursue private interests of the participants (trade association), sell goods or services (universities) or provide public goods (philanthropic social programs). THE CORPORATION AND ITS STAKEHOLDERS Valeant Valeant was a multinational specialty pharmaceutical company based in Canada, his aim was to produce and distribute drugs Its strategy consists in acquiring existing pharmaceutical companies (and in this way acquiring also the patents on their drugs). In this way they could own patents over drugs without spending much on R&D (research and development): spending money on researching new drugs is risky because you could end up with nothing and in any case an investment in research pays off in years if at all After having acquired a company, they cut off the costs of production (mainly by firing most of the employees the company had) and raised the prices of the drugs they were producing In this way they made a big profit out of their sellings and the price of Valeant shares grew rapidly (= shareholders are happy about that) Valeant justified these price rises saying that they priced their goods based on the benefits that they bring to patients, payers and society; moreover the price of drudge is covered by insurance and patients won’t have to pay them on their own and they will always have access to a drug they need. Valeant’s CEO stated that their duty was to their shareholders to maximize profit and value, and that if they saw an opportunity in the market where a good is “mispriced” they acted appropriately to do what they assume their stakeholders would have liked them to do By the way, the pressure from the public and from government bodies ended up being too strong and this led to a downfall of the company, with stock’s prices and profits plunging. After this, Valeant changed its name, changed its purpose stating they now wanted to improve people’s lives with their products and changed its managers, replacing first of all the CEO Relation between business and society We define business as any organization that is engaged in making a product or providing a service for profit We define society as something that refers to human beings (members of a community, nation, interesting group, …) and the social structure they create together As a set of organizations created by human beings, business is a part of society. It has clear boundaries that separate it from the rest of society but there’s also a high interdependency between society and business. For this reason, managers have to understand the relationship between society and their company to know how their decisions affect or are affected by the social and economic system of which they are a part  For these reasons, if a business wants to be successful in the long-term it has to balance its interests with society’s ones in order to have a positive and fruitful relationship in the society where it exists An example to analyze the relations that occur between a company and society is Amazon: it is the biggest retail company in the world with a market capitalization of around 1.4T USD. From social point of view, it has a lot of pros: - It employees a massive number of people (around 540,000) - Small businesses affiliated with Amazon can use Amazon’s marketplace to sell their products and therefore access Amazon’s global market - Customers can benefit from variety and good prices Amazon offers to them - Amazon invests a lot for innovation a social development But it surely has some cons too: - Other retail companies have lost a lot due to Amazon competition - In Amazon there is a punishing work culture (for example they adopt the “rank and yank” strategy, ranking employees based on their performance and firing the ones with the lower rank) - They promote an unfair competition, for example suggesting more on their website products made by Amazon’s own brands) The purpose of the modern corporation In a company we define: - Shareholders (or stockholders): are individuals or organizations that own shares of the company’s stock - Stakeholders: people and groups that affect or are affected by company’s decisions, policies and operations (stake = interest or claim on the business enterprise) In 2019, Larry Fink (CEO of Blackrock) wrote a letter to all the global CEOs to underline which their role should be both in the company and in the society. Basically, he stated that every company should benefit both its shareholders and its stakeholders. This means that every company should have a purpose that goes beyond making an interest, which is still fundamental to the company, and should effectively serve all its stakeholders (not only shareholders, but also employees, customers, communities, …) A good example of pursuing this purpose is Unilever, a company group which produces food and beverages, cleaning agents and personal care products. Paul Polman, ex-CEO of the company, talking about the purpose of this group stated that a company should have to: - Set an example for everyone. For this reason, Unilever selects suppliers and retailers that respect some standards set to assure the best quality and sustainability along the whole supply chain - Motivate its employees by making them work on something that can make a difference. In this way, the turnover rate is low and you have to spend less money on searching new people and training them There are two different theories about how a company should deal with its stakeholders: - Shareholder theory of the firm: firm is seen as property of its owners and its only purpose is to make profits. Following this theory, since the CEO is hired by shareholders he has no obligations to others, and so does the board of  directors. therefore , shareholders’ interests take precedence over the interests of others - Stakeholder theory of the firm: firm has to make a value for society and its purpose is to satisfy a need in the society, therefore firm must create a value for all stakeholders in addition to profits. All stakeholders’ interest have to be taken into account There are some core arguments for the stakeholder theory: - Descriptive: in everyday decisions, managers direct their energies toward all stakeholders, not just owners, because they care for example for having high quality products, attracting employees, … - Instrumental: good relationships with society are a source of value for the firm. Studies proved that firms that behave responsibly toward all stakeholders perform financially better in the long-run - Normative: any individual who makes a contribution or takes a risk for the company has a moral right to claim some sort of reward from the company An example of the power that stakeholders can have in a market is given by an episode related to the EMI company (Energy Management Inc.), an energy company which wanted to build a wind farm in Massachusetts to supply clean energy. They met a great opposition from residents of the area, non profit environmental groups and local utilities, which cooperate and made the State block this project Stakeholder analysis, interests and power Stakeholders can be classified in different ways: - market/nonmarket: a stakeholder is a market stakeholder if it operates in the same economic market as the firm and has economic transaction with it, while stakeholders that are not directly involved in the market are called nonmarket - internal/external: internal stakeholders operate inside the firm itself, while external stakeholders are individuals or organizations that are not a part of the company Stakeholder analysis consists in the identification of relevant stakeholders and to understand both their interest and the power they have to pursue their goals. Stakeholder interests are the nature of each group’s stake  Stakeholder analysis for a focal organization is based on four main questions: - Who are the relevant stakeholders? - What are the interests of each stakeholder? - How are coalitions between stakeholders likely to form? - What is the power of each stakeholder? Stakeholders can have some sort of power, meaning they can use resources to make an event happen or to secure a desired outcome. Stakeholders have different forms of power: - Voting power: if they have some right to cast a vote (shareholders) - Economic power: if they can somehow control the company from an economic point of view (suppliers, customers, …) - Political power: if they can influence the company through through legislation, regulations or lawsuits (for example governments) - Legal power: if they can sue a company for whatever reason - Information power: if they have access to valuable data Main market stakeholders  Main nonmarket stakeholders Uber study case Uber Technologies Inc. is a technology platform with a smartphone app which connects driver-partners with riders. It offers ride hailing services and it serves customers worldwide through its ride-sharing application One problem regarding Uber is the so called app-on gap: this refers to all the time when the driver is logged in in the app and has their Uber application opened but hasn’t been connected with or picked up a rider. The problem with this gap is that Uber’s insurance covers drivers when they are driving a rider while drivers’ personal insurances cover them when they are not working for Uber. Therefore it’s not clear who should cover them during the app-on gap After an accident occured where a six-years-old girl was killed by a driver during the app-on gap, this question was brought to broadlight and there were requests to Uber, even from the State of California, to start covering drivers every time they are logged in in the app, but Uber opposed worried about this new policy’s costs To analyze the situation Uber is in facing these requests, it is important to do Uber’s stakeholders analysis in order to discover which is the best option for them  First af all, we have to identify which is the focal company and in this case is clearly Uber, and we have to list its main stakeholders, dividing them into market and nonmarket stakeholders: Then we have to identify which of them are for and which are against closing the app-on gap: The stakeholders that are for closing the app-on gap are all the ones that can either take advantage of this situation (taxi companies, uber drivers, American Insurance Association) or that have to defend the interests of the general public (customers, Government, consumer attorneys). On the other hand, we have all the stakeholders that would be touched and negatively influenced by a regulamentations against Uber (competitors in the same situation, high tech trade associations, internet-based firms) After having stated which are their interests, we have to focus on which are their sources of power and how likely they are to form coalitions  We can summarize all the information we collected in a stakeholders map Observing the disposition of the stakeholders and the power degree they have it’s clear that Uber will not be able to oppose these new regulamentations and the best choice for him now is to try to negotiate the best deal possible. Indeed, this is what Uber really did after the accident: they negotiated the best deal possible with insurance companies in order to reduce the costs as much as they could and they let the legislation pass without opposing. Laws designed to close the app-on gap are now into effect in more than a dozen US states requiring companies as Uber to cover with insurance their drivers as soon as they signal availability SunCal study case SunCal is a real estate developer who bought a lot near to Dysneyland theme park in California. They planned to build condominiums there, reserving some of the units for below-market-rate rental apartments, but they needed special permission from the city council to proceed  Conducting an analysis of the stakeholders involved in this case, the map that would result could be something like Disney, lot of local businesses and some politicians were against this buildings, but unions, affordable housing advocates, environmentalists and some other politicians were supporting them Analyzing the power the two possible coalitions have, the one against it is more powerful since it includes Disney, which is the main employer and tax payer of the area Analyzing its stakeholders, SunCal could realize that it was really unlikely to be able to complete its project PATAGONIA STUDY CASE Introducing Patagonia Chouinard Equipment was founded by Yvon Chouinard in 1957 and it initially produced climbing equipment. In the initial spirit of Chouinard, it was just a way to pay his bills in order to be able to go climbing freely and it was only later transformed in a company itself (under the name of Patagonia) Mission Patagonia stated as its own mission to “build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis”.  Since Chouinard saw businesses as deserving much of the blame for most world’s problems, he wanted to create one which could help resolving them Nevertheless, one of the main goal of the company is to reach a +10% annual growth This dualism underlines the company’s philosophy: profit is still important but the main goal is to make a better world In 2018, Patagonia even updated its mission statement saying that they “are in business to save our home planet” Generally, in Patagonia profit is not the only goal, they want to lead by example by promoting passion, motivation and values that have to be shared by employees and suppliers. Being transparent and aware about their decisions, they want to balance between all stakeholders’ interest, making a profit for the shareholders but also creating a good working environment with good working conditions for employees Activities The main activities of Patagonia are: Production: they use only sustainable raw materials and try to reduce their impact as much as they can, even if this results in them spending 10/15% more than competitors in fabric. For example, over the years they implemented the use of organic cotton, which is more expensive but more sustainable. They also offer a repair service for their items in order to reduce waste Research and development: they have laboratories researching how to produce innovative, sustainable and quality items. They also do a lot of field testing, testing their product directly by using them Purchase: they have partnership with suppliers that, as Patagonia does, have to have a responsible approach in order to be sustainable Marketing: they try to make consumers aware through their marketing, making them more responsible about their buys by promoting the concept “buy less, buy better”. For this reason, for example, they distribute free catalogs with inspiring images: they are expensive to produce but they send a clear message. However, Patagonia doesn’t spend a lot on marketing (only 1%), but it receives a lot of free publicity whenever the media talk about them. According to their mission, they promote an image of themselves that is a “direct reflection of who they are and what they believe”, without needing to create a fake imaginary Human resources: they select accurately the personnel and hire people that share their values and visions. Then they provide “environmental” benefits and care about employee well-being, offering for example sport activities Finance: the company is private and owned completely by the Chouinard family, who sets the visions and values and also provide the equity for the organization All the activities Patagonia pursuits are meant to follow the firm’s mission Governance The firm has always remained private because the Chouinard family wants to maintain full control over the decisions and directions the organization has to follow. For this reason the Chouinards are the only owners and they are part of the BoD together with the ex-CEO. The day-to-day activities are managed by a CEO hired by the family to follow their values and reconciling the business with the core philosophy Key stakeholders The key stakeholders are: Owners (= shareholders = Chouinard family) Customers  Employees Suppliers: they are chosen based on their values, they have to respect quality, social and environmental standards Community and general public Environmental groups: some of them even receives donations from Patagonia Competitors Retailers Media Environment: even if it's not a living stakeholder it is important in company’s decisions Implementation of mission In order to follow its mission, Patagonia implements dome concrete practices: It supports environmental campaign, sustainable practices and gives 1% of revenues to environmental organization They inspire and help other firms to adopt the same practices: having a competitor that adopts environmental practices and is preferred by customers for this reason pushes other firms to follow Patagonia’s example It also serves as an experiment to demonstrate that it is still possible to make a profit being sustainable Patagonia is based on credibility and on environmental differentiation strategy, which provides value to the customers and allows the firm to capture that value Still, Patagonia was a profitable firm and Chouinard family was making a large profit from it, until they decided to completely follow their mission sacrificing even their income Billionaire no more: Patagonia change in governance Before the change in governance, the Chouinard family owned all the company’s shares, it controlled all the voting shares and was paid all the dividends  In 2022, the company’s governance was redesigned Patagonia Purpose Trust and Holdfast collective were founded. The Chouinard family owns the trust which owns all the voting shares , so they still have control over all the decisions, but all other shares are owned by Holdfast. Therefore Holdfast, that is a non-profit environmental organization, receives all the firm’s profit and it can use it to support projects to fight climate change and preserve nature. In this way, Patagonia is following its missions in every way it can SHAREHOLDERS RIGHTS AND CORPORATE GOVERNANCE Shareholder objectives and rights We define as shareholders all the investors or stockholders who own a corporation through purchase of company stock. They are a company’s most important market stakeholders There are two types of shareholders: - Individual: also known as “Main Street” investors, are individual people who directly own stock shares issued by companies - Institutional: also known as “Wall Street” investors, are pensions, mutual funds, insurance companies and any institution that invest their money buying stock A company’ ownership can be of two kinds: - Public limited company: are the companies that offer their shares to the public, they are listed in the stock exchange and their shares can be exchanged, so they have a huge number of shareholders. In order to be transparent to the public they are offered they are requested to publish documents describing deeply the situation of the company - Private limited company: on the contrary, private companies don’t offer shares to the general public and are only owned by a small number of members (often a family or a small group)  The general goal of shareholders is to make money out of their ownerships both when stocks’ prices rise (capital appreciation) and by receiving a part of the company’s earnings (dividends) in exchange for their investments. Shareholders interests could be, by the way, in seeking a long-term appreciation or in wanting short-term returns Shareholders, as former owners of the company, have several rights: - They have a right to receive dividends, which are part of the firm’s profit, when it is declared - They have a right to vote to elect the members of board of directors, to vote on major mergers and acquisitions and on changes in charter (which is the purpose of the company) or in bylaw (that are the internal rules and regulations) - They have a right to receive annual reports on the company’s financial condition - They have a right to suit against the company and its officers if they don’t do their best for the company - They have a right to sell their own shares of stock to other individuals and organizations Corporate governance and board of directors We define corporate governance as a process by which a company is controlled or governed through systems of internal governance that determine overall strategic direction and balance sometimes divergent interests The general scheme is: The Board of Directors is central to governance and it has several roles: - They have to establish corporate objectives and then develop strategy and broad policies - Select top-level personnel to carry out this objectives: first of all they have to choose the CEO and monitory the conflict of interests that may occur between the CEO and the company itself - They have to offer and independent judgment to control and overview managers’ performances - They have to protect stakeholders’ interests for example issuing investor relations describing the company and its situation  In order to fulfill the role of independent judges and overviewer of the managers’ work, the composition of the BoD should follow some guidelines: - It typically has 9-11 members and the average tenure is of around 8-10 years - The majority of the members should be outside directors, meaning that they are not managers internal to the company - It may include CEOs of other companies, major shareholders, bankers, academics, government officials, … - It should people with different backgrounds and cultures, of different ages, ethnicities and sex In order to operate effectively a board should have some features: - Select outside and independent directors to fill most positions, meaning they have to be people not directly involved in company’s business - Hold open elections for members of the board and for executive directors - Appoint an independent lead director, meaning they should splitting roles between CEO and board chairman - Diversify board membership between skills, gender, culture, experience, … - It may include a lead independent director, who is an external director which can substitute the CEO as the board chairperson. In this way, the board can meet without the presence of the executives and talk freely about their actions. Afterwards, the LID has to maintain the relationship between the BoD and executive managers The corporate governance can be structured in two different ways - One-tier system: it’s more common in the US and it involves only one executive board including both executive directors and the supervisors combined in one management body - Two-tier system: it is more common in Europe and it includes two boards. One is the executive board including the CEO and other internal managers and the other is the supervisory board including outsiders and external supervisors They operate through board committees including: - Compensation committee: approves salaries and other benefits for the top managers - Nominating committee: recommend candidates for officers and directors - Audit committee: review financial report - Other specialized committees Analyzing the BoD of Facebook we can say - It has ten directors of which one executive (Mark Zuckenberg) - Three of them are not independent, while the other six are - There are three women and skills are well differentiate - They meet four times a week - Zuckenberg is the owner, CEO and board chairman, and this is a point that can be criticized, even if they have LID that should ensure equilibrium Agency problem In modern companies, shareholders and in general owners don’t operate in the everyday business of the firm so they hire professional managers to do so. So the company ends up having separated ownership and control This contract in which a principal delegates an agent to fulfill tasks that imply the power for the agent to take decisions in the name of the principal is called agency  relationship. Following this scheme for a company, shareholders elect the BoD and then they delegate their power to managers such as CEOs By the way, if both principal and agent are utility maximizers, the agent will probably act in the way that most benefits him even if this means to damage the principal. In this, the agent has an advantage called “information gap”: thanks to the fact that they aren’t involved in everyday decisions and management, directors don’t know as well as managers what is really going on inside the firm so they may have some difficulty in supervising what managers do In order to prevent this conflict of interest from damaging the firm, the principal can arrange some safeguard mechanisms, which are usually costly but fundamental to the good operation of the organization A way to set a lifeguard mechanism can be working on executive compensations, for example with pay-for-performance through giving them stock shares: in this way managers become shareholders and goals should align more, even if setting as a priority for executives making shares price grow may lead to unethical behavior from them Protection of shareholder interests There are external bodies such as government agencies that protect shareholders’ interests through regulations and policies This policies may regard financial disclosure, meaning that companies’ annual report are mandatory, or insider trading, which consists on using non-public information to trade stocks, because the main idea is that everyone should have access to the same amount of information when operating in these markets Another way in which shareholders can defend their interests is through shareholder activism, which consists in aggressive voting or selling shares in order to obtain something from managers or from the BoD if they are not happy about how they are acting THE NATURE OF MANAGEMENT What do managers do? Recalling the definition of management: it is a process designed to achieve an organization’s objectives by using its resources effectively and efficiently in a changing environment Therefore, managers are people who make decisions about the use of the organization’s resources and concerned with planning, organizing, directing and controlling the organization’s activities to reach its objectives The major functions of management As he has to organize different activities, a manager is engaged in different fields to harmonize the use of resources so that the business can develop, produce and sell products: First of all the company sets its mission, declaring which is its fundamental purpose and basic philosophy and defining which are its main goals and the themes it is focused on. From that general mission a company then decides which are its goals, which are general non-quantifiable targets the company wants to achieve (for example having better quality products, higher integrity, …). This goals are then shaped into objectives, that are measurable results the company wants to reach (like having a +10% growth) After the directors have shaped which are the firm’s objectives, the managers have to plan how to reach them, deciding what needs to be done, by whom, when, how,… Plans are usually of three kind: - Strategic plan: which involves long term goals and activity or overall strategy - Tactical plan: which states how you should operate in order to achieve your goal - Operational plan: which is a concrete step-by-step action plan to fulfill the tactical plan The other three main activities of the manager are: - Organizing: structuring of resources and activities to accomplish objectives in an efficient and effective way - Directing: since the employees that work him need to be lead and motivated, a manager should guide them to achieve organizational objectives - Controlling: he should control how activities are going, measuring performances and comparing them with past years’ ones to find which are the deviations from the standard and investigate their roots. After having evaluated the activities, he should take corrective actions when necessary to keep the organization on course Level of management In small companies, just one manager is sufficient to cover all the activities a manager should cover and he fulfills them all. In bigger company, on the contrary, often more managers and needed, and they have to be organized in different levels: The three main levels are: - Top managers: they spend most of their time planning and making the organization’s strategic decisions. They include CEOs, CFOs and COOs. The CEO is the Chief Executive Officer and he manages the overall strategic direction of the company and represents the company to stakeholders. The CFO is the Chief Financial Officer and he manages the financial operations of the company and reports to the CEO. The COO is the Chief Operating Officer that is responsible for daily operations of the company and reports to the CEO. They are at the highest level of management, but they still have to report to the owners or the directors who employed them. - Middle management: rather than for strategic decisions, middle managers are responsible for tactical and operational planning to implement practically the guidelines given by top managers. They are usually divided into plant managers, division managers and department managers - First-line management: they directly supervise workers and the daily operations of the company in order to make them follows the plans given by the upper levels For every level of management, different functions have different importance:  Every managers needs a mix of skills, but then at every level there are managers that specialize in different areas, each of whom is necessary for the company: The main skills that every manager needs are - Technical expertise: they have to have the specialized knowledge and training required to perform jobs related to their area of management. These skills are most needed by first-line managers that have to directly train and provide guidance to the employees - Conceptual skills: that is the ability to think in abstract terms, to see how parts fit together to form the whole and to think creatively. These are most needed by top managers - Analytical skills: they have to be able to identify relevant issues and recognize their importance, finding which are the causes of them and the main critical factors. This is most important for top managers - Human relation skills: that is the ability to deal with people both inside and outside the organization. This includes well communication and understanding skills and are important at every level of management, especially in the area where they have to deal with people Decision making We have to make decisions every day and therefore we must be able to compare alternative opportunities and elaborate all available information. The theory of the homo economicus describes an individual as completely rational and with the only goal of maximizing his income and wealth, while maximizing his utility in every choice he makes However, we are not really like that and we deal with emotions and irrational thoughts. Therefore, when we analyze a situation, we can suffer from some biases: - Confirmation bias: we usually prefer picking results and information that support our idea instead of considering we may be wrong  - Anchoring bias: the first piece of information we receive about something usually weighs more (first impressions count) - Groupthink: we tend to support dominant opinions - Availability bias: we usually give greater importance to available information instead of searching for unavailable one - Overconfidence bias: we usually overestimate our ability or accuracy of predictions, thinking we cannot make errors - Authority bias: we give greater credibility to authoritative people If you are an homo economicus and you have to make a decision, you analyze every option and choose the one that best fits your needs. For example, imaging you have to buy a laptop, you analyze rationally your budget, time, the memory the computer has, its quality, … But we are not that rational, we are limited human beings and therefore we make decisions in other ways. We can’t collect all the information that exists regarding a choice, and we cannot compare all the possible alternatives. Moreover, we are influenced by our preferences and tastes, or by trends and social interaction. In a nutshell, real human being is not to maximize the profit or the utility but to make the decisions that most improve their well-being In a company, managers have to make decisions every day, and their decisions can regard every topic related to the firm. In order to reduce as much as they can the influence that rational thoughts and biases can have on them and to actually maximize the utility of the firm, managers have to adopt rational approaches to problems. A systematic approach to make a decision includes defining the decision situation, developing alternative options to solve the situation, analyze the options, selecting the best option, implementing the decision taken and then monitoring the consequences of the decision ENRON CASE STUDY Enron was a company active in the energy industry In 1992, the Energy Policy Act deregulated much of the energy industry: if before energy transmission was monopolized by utilities, now it was possible for company like Enros to buy, sell or trade energy Mark-to-market accounting Usually, a company can report revenues and profit only after it has realized them, but in some cases exceptions are allowed: with mark-to-market accounting you can record as earnings in your financial account even incomes you are expecting to have in the future, for example when you have a good or a credit, or when you make an investment, you can record as an income the earnings that you expect to have from them, using the market value they have instead of their book value. It is usually a measure of the fair value that assets can have over time and it can provide a more realistic description of a company’s financial situation. However, since future operations are always uncertain and market prices can change, a large use of mark-to-market accounting can lead the financial statement to be inaccurate, especially if it is done maliciously  Enron used mark-to-market accounting and therefore they can register earnings from operations that they expect to have a return in the future, even if at the end they made no profit from them. Using this technique, they could register virtual earnings having a very subjective profit calculation; and they also have pressure to close more deals to maintain earnings growth, even if they didn’t have a real income from those deals. For example, trying to diversify their investments, they had a deal with Blockbuster on which they had huge expectations but that ended up without any good results nor any money made, resulting only in an accumulation of debt Special Purpose Entity or Special Purpose Vehicle (SPE/SPV) SPE (Special Purpose Entity): a SPE is a legal entity created to fulfill specific and temporary objectives. For example, it can be used to isolate the financial risk of an operation in an orphan company rather than in the parent firm. It receives the money it needs for that operations and conducts it by itself Enron largely used SPEs to hide its debts: they transferred their debts and liabilities to other companies in order to have a clean image. Banks and lending companies didn’t do much to block this malicious behavior because there was a conflict of interest between investors and underwriter: investment banks were involved in Enron’s deals and they hoped to make a profit if one day Enron was capable of cover their debts, so they helped it hiding them hoping for having a return Key stakeholders Managers: they were the main actors in Enron business. Skilling was the CEO, Lay was the founder and president and Fastow controlled most of the SPVs. They had a major role and were responsible for the fraudulent decisions Enron made Government: they had political connections and were the main suppliers of energy for the California State. Enron was even responsible for the California energy crisis: they cut down most of the supply in order to make price increase, resulting in the State not having enough energy to supply all its utilities Auditors: the main auditor was Arthur Andersen, that had the responsibility to certify financial accountings as valid. However, they were getting paid both as auditors and as consultants, so they were hiding the bads of Enron in order not to loose this important client (sometimes even destroying physically proofs) Board of Directors: they were passive watchers of the Enron activity, they didn’t try to stop their fraudulent operations because they were still making money out of them Banks: didn’t oppose to Enron illicit moves, such as the large use of SPVs Enron collapse The corporate culture based on hiding debts and bads to maintain a clean image as a profitable company led Enron to collapse once they weren’t able to finance their activities any more. They took too much risks that never fruited for them, but were also greedy for profit The lack of transparency, the consent from auditors and the inadequate Board oversight led Enron to one of the greatest bankruptcies of the last decades, with thousands of employees and investors that lost their jobs and their savings How could it be prevented? They should have reduced conflicts of interest, for example separating bank activities (underwriters from investors), having independent auditors (meaning having different companies for auditing and consulting) and having independent directors that could have a more independent judgment  After the Enron collapse, measures were taken in order to prevent similar situations from happening. In order to improve financial disclosure and avoid fraudulent accounting practices, managers now had to certify the accuracy of the financial statements, proofs and recordings used to write the financial statement had to be kept for a determined period before being destructed and companies had to respect standards for external auditors’ independence (they couldn’t be also their consultants, they had to change theme every while, …) THERANOS STUDY CASE Theranos was founded in 2003 by Elizabeth Holmes. She was able to raise a lot of money from investors claiming that she would have been able to create a test that with one single drop of blood was able to perform hundreds of analyses. The company perfectly reflected Silicon Valley’s slogan “fake it until you make it”: even if her claim was false, she declared she reached the goal she set hoping to be able to really reach it with the money from investors She was able to do that because she had the right connections: she had some rich family friends that invested in her and she had an important university mentor that helped her gaining credibility She created the Board of Directors of her company choosing very important people taken from the top American sectors. They were all male, white, old men and they were all very powerful and respected people (they were senators, secretaries of State, admirals, …). However, there were several problems: there was a clear lack of diversity and none of them was really expert in the field of blood testing, the field in which the firm actually operated. So they all had leadership skills and made people trust in Theranos, but none of them really understood what Theranos day-to-day business was From its BoD and the connections Holmes had, Theranos gained a great credibility and attracted investors. It also had a deal with Walgreen, which is a pharmaceutical stores franchise, to have Theranos machines in Walgreen stores, and this deal made Theranos credibility grow a lot Despite all the investments they attracted, Theranos never really developed a machine that could fulfill the claims they had: they had a lab prototype but the tests they did with it gave results that were really different from traditional methods’ ones, resulting unreliable Theranos activity was based on secrecy: only few people know exactly what was really going on and, basing on its credibility, people believed the false claimings Theranos made publicly. For example, employees at Theranos had to sign confidential acts and couldn’t tell anyone what they did when they were working Key stakeholders The founder and CEO Elizabeth Holmes Board of Directors: they didn’t know much about the firm operational field, so they couldn’t really overwatch and control what was happening Investors: they believed in the image Theranos gave of itself. Due to commonthink and authority bias, even important people believed it and invested in the project.  Nevertheless, the company was never listed as public because it would have had to disclose its secrets Employees: even the ones that knew a little what was happening never told anything to anyone Media: the media proposed a really good image of Elizabeth Holmes: she became a cover girl, with a trust-worthy image of the self-made female entrepreneur FDA (Federal Drug Administration): Theranos exploited some loopholes that FDA had in order to operate with their machines even if they hadn’t been tested or approved Comparison between Enron and Theranos cases ORGANIZATION Organizational culture We define organizational culture as a firm’s shared values, beliefs, traditions, philosophies, rules and role models for behavior It reflects the firm’s mission and it helps employees to work in the right direction: the firm’s work is effective if employees share its values and views The organizational culture can be expressed in mission statements, codes of ethics, memos, manuals, ceremonies or more informally in dress codes, work habits, extracurricular activities and stories One of the best organizational cultures in the world is Google's. They have caring about employees as one of the basis of the company, and they offer them free meals, gyms, parks, employee social gatherings and financial bonuses. This is expensive for the company but it is important to create the working environment they want and it also improves productivity (if the employees get to know each other through community event they will communicate better in the workplace) Functional areas Firm’s activities can be divided in different functional areas, which are characterized by sets or processes with a common function or with the same specialized set of skills The main functional areas are research and development, purchasing, manufacturing, sales and marketing, logistics Research and development (R&D) are essentials to establish product features and production methods. They include research, technology and competition watch, evaluation of customers’ needs, development of new products, problem solving with existing products in order to upgrade them and quality checks Purchasing regards buying long-term use equipment and facilities, raw materials and services. It includes recognition of needs of the firm, evaluation and selection of suppliers, placing orders and analyzing the firm’s expenses Manufacturing deals with transforming raw materials into final products. Therefore, it includes processing and assembling raw materials, planning, controlling the quality of the products and it requires several technical and economical skills Sales and marketing are aimed to analyze the needs and wants of the customers, how much they are willing to spend and what the competitors are offering. The main goal is to sell the firm’s products while optimizing economic profitability and marketing’s basis are usually summarized in the so called 5P: - Product: what product you should produce - Place: where you should promote your products - Placement: where customers should find your product - Price: how much it should cost - Promotion: how you should promote it Logistic deals with how to transport, store and move raw materials, semi-finished and finished products Debt and equity management and finance are a set of activities aimed to collect money in order to cover a firm’s financial needs, which come from payment the firm has to afford. Therefore finance is about forecasting and analyzing financial need ìs, finding the optimal mix of equity, capital and debt capital and planning and executing transactions involving capital. The main sources of capital for a firm are equity and debt Equity is rewarded by dividends, which are paid only when the firm is making a profit, while debt is rewarded by interest, which has to be paid in any case. Therefore equity is more risky, because it pays back only if the firm makes a profit, and for this reasons payback on equity should be higher than payback on debt  Human resources management is the implementation of an organizational system regarding personnel. It includes recruiting, hiring and training the right people with the right contract, promoting employee relations and analyzing tasks, workloads, skills and performances Other functional areas can include: - Tax management: computing and paying taxes - Non-core investments: investing in activities non-related with the firm’s core business in order to create investments revenues - Insurance management: to cover from damages from negative events Organizational structure The organizational structure develops with the growth of the business At the beginning, when the business is just born, the founder cover all the roles and does everything: it buys what he wants to sell, chooses prices, displays the merchandise, does the accounting and assists customers When the business grows, the owner can start hiring people. For example he can hire a salesperson and a merchandise buyer to help him run the store. All the employees now report to the owner As the business grows more and more, it becomes necessary to hire different people with different specialized skills and a clear organization is required. Maybe now the owner also has to be away from the store frequently, and therefore he designates someone to manage it when he is away. For these reasons, now the firm needs a formal organizational structure We define organizational structure as the arrangement of the relationship of positions within an organization. It is when managers assign tasks and activities to specific individual or groups and coordinate the diverse activities required to reach firm’s objectives We define specialization as the division of labor into specific tasks and the assignment of employees to do a single task. The goal is the efficiency Specialize an activity has different benefits: - Employees learn through repetition, they become better at doing their job - It can promote identification at work and motivation: becoming a master at doing what you do improves satisfaction (pleasure of mastery) - Skills can be uneven distributed since you can specialize the activities according to skills - There can be differentiation of managerial and technical orientations, specializing the activities according to orientation. Since every employee is different, this can help to get the best out of each of them - There can be differentiation between technical performances of the plants in order to optimally use specialized facilities and equipment - It reduces costs of preparation and passage between phases: you can reduce for example time losses of passing from a phase to another However, an extreme specialization can lead to demotivation. Overspecialization can lead employees to become bored and dissatisfied if the task they have to do is too limited, resulting in poor quality work, more injuries and high employee turnover  In general, the organizational structure has 4 elements: departmentalization, span of control, formalization and centralization We define departmentalization as the grouping of jobs into working units usually called departments, units, groups or divisions. Departments are usually organized by: - Function (functional departments): grouping jobs that perform similar functional activities. It is very simple and good for small organizations, and it allows cost savings through specialization. On the other hand, it can prioritize departmental units’ goals instead of the ones of the whole firm, it causes slower decision making because it makes difficult to communicate between different areas and therefore it has a greater need for coordination - Product (product departmentalization): organizing jobs in relation to the product they make. Since the people working on the same product are together, it simplifies decision making and allows easier coordination within divisions. Every division has a whole organization inside it needed to produce and distribute the product. Therefore, this departmentalization can lead to duplicate functions and resources, which reduces efficiency, and to emphasize product rather than organizational goals - Geographic region (geographical departmentalisation): grouping works according to geographic location. It allows quick and efficient responses to customers and a better knowledge of customers. But again it can lead to duplicate functions and resources and it requires a large administration staff: a large control system is needed to coordinate operations because there is poor internal communication  - Customer (customer departmentalization): grouping jobs around the needs of various types of customers. This allows to address the unique requirements of each group of customers and to get to know customers very well. But this also requires a large administration staff and can emphasize customer rather than organizational goals The span of control refers to the number of subordinates a manager has. The organization of a firm is divided into organizational layers, that are the level of management in the organization itself. The span of control can be: - Wide: when a manager directly supervises a large number of employees. With this span of control managers and employees are in close proximity and managers mostly supervise a number of subordinates that need to be highly competent. There are few interactions between subordinates and supervisors and problems are treated as uncommon - Narrow: when a manager only supervises a small number of subordinates. Superiors and employees are not in close proximity and the manager has multiple responsibilities. The interaction between subordinates and superiors are frequent and the problem are treated as common Formalization means standardizing behavior through rules, procedures and training and it always increases when the firm gets older, larger and more regulated. However, it has some downsides: fer example it leads to less organizational flexibility, discourages organizational creativity and increases job dissatisfaction and work stress The degree of centralization a firm has is the degree to which authority is delegated throughout the organization. Delegating authority means giving tasks and empowering employees. This gives responsibility to employees to carry out assigned tasks by their own increasing satisfaction, but also makes them accountable for the outcome, meaning that they are answerable to a superior for the results of their job. Centralization is often preferred when the decisions to be taken are risky or when lower managers are not very skilled in decision making, but this form of organization could lead the firm to be slower in implementing decisions and to respond to changes and problems on a regional scale. Decentralization is often preferred when the firm operates in complex and unpredictable environments, in order to make it as fast as possible in responding to changes Forms of organizational structure All these elements combine in the organizational structure that can finally have different shapes. The most common structures are the line structure, the multidivisional structure and the matrix structure  The line structure is the simplest one and it includes direct lines of authority that extend from the top manager to the employees, dividing into the main departments. When a mid-level manager has to make a decision, he only has to refer to his immediate supervisor and this can help to implement decisions quickly. However, this requires top managers to have a wide range of skills and knowledge Multidivisional structures organize departments into larger groups called divisions and they can be organized by product, geographic region, function, … In this case, corporate headquarters set the vision for the whole group and then the decision-making authority is delegated, allowing divisional and department managers to specialize. In this way better decisions are made faster and tend to be more innovative. Moreover, by focusing each division in a specific field, each one of them is more likely to provide products that meet its specific needs. On the other hand, it brings to isolation among organizational areas and it creates duplication To try to reduce duplication, in the last few years some firms have implemented the so-called matrix structure. This structure sets up teams from different departments creating two or more intersecting lines of authority. It combines project-based departments with function-based departments. This provides flexibility, enhanced cooperation and creativity, it develops general managers and reduces the amount of work the CEO has to do and it allows the company to react quickly to changes in the environment by giving special attention to every specific project. However, matrix are complex and usually expensive and can lead employees to be confused on whose authority should have the priority (the project manager or the direct supervisor). For these reasons, firms usually implement matrix just for specific projects and for limited periods of time An alternative to these structures can be the team structure, where there isn’t a hierarchy and that is focused on coordination rather than on control. This structure is made of multiple work groups with no authority line between them, there isn’t work formalization and the teams are free to design their work as they like, and so they are accountable for their performance. This structure is good for employee engagement and motivation, flexibility and low barriers between knowledge areas. However, team structures are often characterized by pressure to perform, may have unclear chain of command and can lead to problems when the company grows larger Freshii study case Freshii is a restaurant franchise that focuses on fast and healthy food options. They offer a variety of food from burritos and salads to frozen yogurts and smoothies Freshii organization is a great example of decentralized and team structure. Their organization is flat: they don’t have mid-level managers and all employees are executive managers Even the organizational culture really prioritizes teamwork and communication: managers and employees work in the same room and are engaged in team activities. In every store, employees have to make decisions on their own and manage part of the organization by themselves. Therefore they have to be energized and responsible people and they have to be invested in their job, and Freshii only hire people that respect these standards When the company grows larger, an organization like this can’t fit all its necessities anymore. Indeed, Freshii was acquired by a larger company in 2022